China’s central bank identified 586 lenders and financing firms in the high-risk category in its annual financial stability report, which was published on Monday. That was about 13% of the total, up a little on last year.
But aside from stepping up focus on the more reckless lenders, policymakers have been pursuing another objective: trying to get the biggest banks to lend more, especially to smaller firms, which are frequently starved of funding.
In that context, a group of branches at China Construction Bank, one of the top five state-owned lenders, earned a rare rebuke from the State Council this month for forcing smaller borrowers to buy insurance as a condition for getting loans. Ping An Bank, another leading lender, came in for similar criticism.
Sohu’s financial news portal said it was telling that such a senior body as the State Council had expressed its displeasure. “This was enough to show that, in the eyes of the central government, it is a very important issue that some banks have increased the financing costs of small and micro enterprises in disguise,” it believed.
As we mentioned in last week’s Talking Point, the government is trying a more targeted approach to boosting the economy, including adjustments to banking reserve ratio requirements that free up cash for loans and reductions in interbank lending rates that are supposed to make it cheaper to borrow.
The reasons why are fairly well known. Smaller, private sector enterprises are the main engine of the economy, accounting for more than 60% of its GDP and 80% of the job creation. Yet paradoxically they find it harder to get loans from lenders more accustomed to doing business with state enterprises like themselves. The banks also take the view that this is a safer undertaking as well, because failing SOEs are more likely to be bailed out from state coffers.
In a bid to change the mindset the central government compelled the top five lenders to increase their loans to small companies by 30% this year (defining small businesses as firms with total credit lines of Rmb10 million or less). Calling it “inclusive financing”, regulators have already claimed success, with three of the big five banks surpassing the target and the others expected to do so soon.
Critics have countered that the campaign captures a sub-set of small business lending and isn’t enough to demonstrate that the banks have changed their ways.
This month’s censure from the State Council also hinted at how some bank branches have been rigging the results by looking for ways of protecting themselves on loans they regard as riskier, such as requiring borrowers to buy insurance on assets put up as collateral.
More than 2,000 businesses that took out loans from China Construction Bank were told to purchase property insurance, for example, with the majority doing so from the bank’s insurance subsidiary. Ping An Bank told borrowers that they would increase interest rates if individuals didn’t buy life insurance, the banking regulator added.
Clearly that goes against the spirit and the practice of making financing easier for small firms, especially at a time when a clampdown on the shadow-banking sector has closed off a previously significant source of their funding.
Factor in the trade war with Washington – which is bashing business sentiment and heaping pressure on cashflows – and the commercial conditions are some of the toughest in years.
So what else can policymakers do to generate more credit for the private sector, especially in supporting more business investment?
Chen Jingyang, an economist at HSBC, has argued that credit guarantees from the government would help in cases where borrowers don’t have the collateral the banks would normally demand. Lenders also don’t like it when loan applicants can’t show much of a credit history, which is something that could be remedied by the pooling of other data, such as tax payments and social security contributions.
Of course, policymakers are already preparing a new database of credit scores (see WiC469), which might help more firms in convincing the banks to give them a loan. n
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